Business Law Page 1

Business LawThe contractor agrees to build, remodel, reshape, repair, or otherwise do a job for the customer or owner. In return, the customer or owner agrees to pay the contractor money. This agreement is called a contract.

Since contractors almost always work through contracts, it is important for you to understand some basics about contracts. These basics are factors like what constitutes a contract, why contracts should be in writing, and the basic rules of forming and signing contracts. Understanding these principles can save a contractor a lot of time and trouble, not to mention money.

A properly drafted contract will assist the contractor in the event that a dispute arises with the owner, architect, subcontractors, or suppliers before, during, or after a construction project. This is especially true if the dispute goes to court. However, the most important reason for a thorough understanding of contracts and their proper use is to prevent disputes from arising in the first place. If all of the parties to an agreement completely understand what they must do, and what they can expect the other parties in the contract to do, then disputes should not arise.

WHAT IS A CONTRACT?

A contract is basically a legally binding agreement between two or more persons. A “person” may be an individual, corporation, partnership, limited liability company (LLC), or governmental agency. A contract should include all the terms and conditions of the agreement. When each person, or “party”, agrees to all the terms, the contract is formed. At that point, each party is bound to do, or “perform”, whatever duty, or “obligation”, that the terms of the contract require of them. They must also perform their obligation in the way stated in the contract. If he or she fails to perform their obligation, or performs it in some other way, the other parties may sue them for breaking, or “breaching”, the contract. For example, if John promises to build a deck for Al, and Al promises to pay John $100 a month for six months, then Al must pay John according to those terms. He cannot simply wait and pay all $600 at once. Similarly, if John promised to finish the deck in six weeks, he cannot wait and finish it in nine weeks. Contract breaches will be discussed more, later. It is not necessary that a contract be written in any certain form. The standard AIA or other pre-printed standardized contracts are very useful, but not necessary. A contract in the form of a letter, signed by both parties, that sets forth all of the necessary terms and conditions, is just as enforceable. Similarly, it is not necessary that any changes in the contract be in any certain form. A simple letter stating, “I have agreed to perform _____________ extra work, and you have agreed to pay ___________ extra dollars”, signed by both parties, may be sufficient. When in doubt, get it in writing..

One important rule to keep in mind is that you are presumed by law to know everything contained in a document which you sign. Neither party is entitled to claim at a later date that they did not know the contract stated a certain term or condition. Therefore, it is very important for you to thoroughly read and understand any contract before you sign it. If you do not understand a provision, or disagree with a provision, do not sign the contract until you understand the provisions fully and both parties agree to them. The time to change any of the provisions of the contract, including any of the preprinted provisions of a standard contract, is before you and the other party sign it. Standard contracts are prepared and supplied by various players in the construction industry and are designed to address some of the more difficult areas of contract involvement and interpretation. Although these contracts are designed to eliminate litigation, you should be aware that the forms are highly technical and should be carefully reviewed by you or a good attorney prior to signing them. Some of the more widely used and recognized standard forms are the American Institute of Architects Form (AIA), the Associated General Contractors Form (AGC), and the National Society of Professional Engineers Form (NSPE). Additionally, when bidding a public contract, the governmental agency or awarding authority will probably have developed a form for bidding and performing the construction project.

MAKING A CONTRACT

You need three primary elements to make a contract. These are an offer, an acceptance, and consideration. Once these elements exist, the contract is formed and it is binding. For your protection, however, the offer and acceptance should be in writing. Although a verbal (or “oral”) contract is binding under certain conditions, a written contract is easier to prove.Before any contract can be formed, one party must make an offer. It is important to understand the difference between an offer and negotiation. An offer must be clear and specific on the basic terms of the agreement, such as price, scope of work, and schedule. If any of these is not included, then it is merely a negotiation, not a true offer. The distinguishing factor between an offer and mere negotiation is that an offer clearly expresses an intent to enter into a certain contract if the other party agrees to the terms of that contract (i.e., accepts the offer). A common example of an offer is a bid.

The bid sets forth an offer to do certain work under certain conditions for a certain price. If the bid is accepted, a contract is formed. An example of a statement, which would be mere negotiation rather than an offer, is “I can give you a great price for the electrical work on that building.” If the party had said, “I agree to perform the electrical work in the building according to the specifications you have given me for the sum of $45,000.00,” it would constitute an offer.